Features of real investments
As already mentioned, the actual investment may take the form of investments in new construction, purchase integral property complexes, new equipment, expansion of activities and their conversion and more. The task of financial management is to find investment projects, evaluating their performance and selecting the most effective ones to implement.
In an analysis of investment projects must pay particular attention to the duration of the project life cycle and its separate stages. During the project lifecycle to understand the period from inception of the project until its liquidation (instead of commissioning because of the product's life cycle depends largely on economic efficiency and return on investment).
In the project cycle can be divided into three main stages:
- Doinvestytsiyna or previous stage - the preparation phase of the project and ensure its financing;
- Investment stage - the stage of design and construction;
- Operational (production) phase - phase operation of the investment object. (In case of diversified production start of the operational phase is the date of the start of production and sales of at least one type of product or service. At the same time can continue work according to the investment plan related to the preparation of production and sales of other products.)
Justification feasibility of real investments made on or prior doinvestytsiyniy stage. Errors at this stage are expensive to investors. During the study doinvestytsiynoho financial manager must:
- Assess the overall feasibility of the project (based on the demand for products in internal and external markets, available feedstock, the nature of processes, the need for highly qualified personnel, the timing of the project, the level of production costs, etc.)
- Analyze various economic alternatives (markets of raw materials and finished products, production capacity and technological solutions, production program, marketing strategies, financial costs, etc.);
- Economically justify the effectiveness of the project on the options selected during the previous evaluation.
To evaluate the efficiency of real investment using the following indicators:
1. Net present (reduced) value (NPV) describes the total profit from the investment project.
2. Index Return (IRR) shows the return on invested capital and is calculated by the formula
3. Term ROI shows how long it takes to initial investment in the project is fully paid off by cash flows generated by the project. If annual cash flow evenly payback period is determined by the formula.
If the cash flows for the years differ significantly, it is necessary to make more precise calculations. For real results calculated discounted payback period, taking into account the present value of future cash flows.
4. The internal rate of return of the project describes the discount rate at which the total discounted cash flow for the entire life of the facility is the initial investment. In other words, it is the discount rate at which NPV = 0. The value of this indicator usually found using special software or by selection.
Value of internal rate of return is determined solely for comparison with the average price of investment resources and decision making to optimize the structure of funding sources.
Defined performance of the project compared with the criterial values.
In order to implement the project was beneficial to have satisfied the following requirements:
• Net present value of the project and be positive as much as possible;
• profitability index must be greater than one;
• payback period should not be too long (usually no more than 5 years);
• internal rate of return should be higher than the weighted average price of investment resources.
The next stage of feasibility report of the project is to determine the performance of financial and business development of the company after investment (return on assets, return on equity, capital turnover, turnover of inventory, liquidity, etc.) And comparing them:
- Averages of indicators;
- Performance of competitors;
- Indicators acceptable to some members of the investment project.
The important point doinvestytsiynoho study is to evaluate the sensitivity of the project to change output parameters (factors internal and external environment). Often considered the impact of factors such as the term of the investment phase, unit price, sales, cost of borrowed resources, cost of raw materials, the level of taxes and others.
In an analysis of project sensitivity calculated rate of change in the net present value by changing the individual output parameters for 5, 10, 15, 20 (and t. E.) Percent and identifies factors to which the project is most sensitive. Over the following factors need to exercise constant control and timely implement appropriate management measures to reduce the possibility of adverse changes in the investment process.
To assess the degree of investment risk appropriate to carry out an analysis of scenarios of projects with uncertainty conditions for its implementation. Typically, this is determined by the net present value of the project in pessimistic, most likely (normal) and the optimistic scenario. More risky is such a project in which the range of variation between optimistic and pessimistic forecasts the greatest result.
The project is expedient to implement when the total expected effect is positive.
Monte Carlo method allows to determine the probability of obtaining the planned results by simulating many scenarios within defined parameters key factors. The mechanism of this method is to build a predictive model of financial results of the project, identifying key factors influencing and setting their maximum and minimum values according to experts. In addition, given the number of runs scripts, connection type and value distribution key factors.
The process simulation modeling is implemented using special computer programs. The results of simulation modeling analyzes project manager. This compares data on expected losses and income investors with regard to their probability and taken the final investment decision.
When comparing alternative investment projects preferred criterion "maximize the net present value of the project." The increase in this indicator is a priority target guideline of investing money.
Value of internal rate of return is not suitable for comparison of alternative projects. It describes only the possibility of compensation expenses related to the implementation of the project, ie GDP (A + B) * GDP (A) + GNP (B).
An important objective of financial management is to develop an optimal investment portfolio. How to optimize the distribution of investments across multiple projects depend on grinding projects to be or not.
If the projects to be grinding (that can be implemented as a whole project and its individual parts on an equal footing with other investors), the choice of projects in the investment portfolio is made the criterion "maximizing profitability index." To this end, each project yield index calculated and carried out projects ranging as to reduce this figure.
In the investment portfolio included first in profitability projects that may be financed in full. The next project is included in the investment portfolio as a residual, ie only the part that can be financed.
Where the investment projects are not subject to grinding, the optimum combination of projects is through the consistent calculation of all possible within available resources investment projects combination. And the combination that maximizes the net present value of the investment portfolio is considered optimal.